Wisconsin Restrictive Covenants: A Potential Change In The Weather

In recent memory, Wisconsin has been viewed as one of the more pro-employee states when it comes to the enforcement by employers of non-competition agreements and other restrictive covenants against former employees. Among other things, Wisconsin’s current law, Wisconsin Statute Section 103.465, requires that a court throw out — rather than reform — a restrictive covenant provision if any portion of that provision (even one word) is found to be overbroad and unreasonable. This prohibition on the practice of “blue-penciling” (reformation by a court of an overly broad restrictive covenant to make it reasonable) alone has made Wisconsin one of the more difficult states for employers to successfully enforce non-competition and other restrictive covenant provisions against former employees. This difficult enforcement environment has been applied to restrictive covenant provisions ranging from traditional non-competition arrangements to post-employment prohibitions on soliciting a company’s customers and even to confidentiality provisions intended to protect a company’s confidential information.

Enter new legislation introduced in the state legislature on March 5, 2015 by State Senator Paul Farrow. As introduced, 2015 Senate Bill 69 would make sweeping changes to Wisconsin law regarding restrictive covenant provisions in the employment context. If passed by the legislature and signed into law, this bill would usher in a wholly new approach in Wisconsin to restrictive covenants by employers, those drafting these agreements and the courts. Following is a summary of some of the more important changes that the legislation would make if it becomes law:

Consideration

Current Law: Consideration is the legal concept that in any agreement between two parties each party must give something of value to the other party. In Wisconsin, consideration is required for restrictive covenant agreements. The employee provides a promise not to compete against his or her former employer (and, usually, other similar restrictive covenant promises), and, in return, the employer must give the employee something of value. New employment is sufficient in Wisconsin, as is a promotion. A raging debate has existed in the state, however, about whether continued employment alone is sufficient consideration to support an employee’s restrictive covenant promises. Indeed, in Runzheimer International v. Friedlen, a case currently awaiting decision by the Wisconsin Supreme Court, the sole issue is whether continued employment alone is sufficient consideration to support a restrictive covenant agreement in Wisconsin.

Proposed Legislation: The proposed legislation seeks to clarify the types of consideration that would be considered valid support for an employee’s restrictive covenant promises. Among the types of sanctioned consideration would be the following:

New employment. A restrictive covenant executed at, or within a reasonable time after, the commencement of employment would be supported by valid consideration, provided that the offer of employment was contingent upon the execution of the restrictive covenant agreement.

Provision of payment or another thing of value. After the commencement of employment (for example, in the context of a company’s current employees), consideration will exist if the employee receives payment or another thing of value in connection with the execution of the restrictive covenant agreement. The bill specifies, among others, the following as examples of this type of consideration: (a) monetary consideration (with no minimum amount), (b) a bonus or other incentive payment (again with no minimum amount), (c) additional paid time off, if the employee acknowledges it as additional consideration, (d) access to a bonus or other incentive program or pool, if the employee would not have had access without signing the restrictive covenant, (e) continuation of employment at a rate of pay and benefits equal to or greater than received before signing the restrictive covenant, if continuation of employment is contingent on executing the agreement and (f) a promise made at the time of execution of the restrictive covenant to provide any payment or other thing of value during the term of the restrictive covenant, if the employer fulfills that promise.

Additional consideration at termination. A restrictive covenant agreement executed at or about the time of termination of employment would be supported by valid consideration if it is above and beyond any compensation due the employee and any consideration provided for any other covenants, releases or promises made to the employee, if the employee accepts this additional consideration.

Reformation (Blue-Pencilling)

Current Law: As noted above, under Wisconsin’s existing restrictive covenant law, a court must throw out a restrictive covenant provision if any portion of that provision is found to be overbroad and unreasonable. Courts may sever an overbroad restrictive covenant provision (for example, an overbroad non-competition provision) from a distinctly separate restrictive covenant provision that is not overbroad (for example, a separate customer non-solicitation provision). The statutory inability to blue-pencil within a restrictive covenant provision, however, has led to perverse results in which courts have had to throw out entire provisions because the court determines that one or just a few words in the provision make it overly broad and unreasonable.

Proposed Legislation: The bill, if passed, would require (the statute uses the word “shall”) courts to modify an overly broad restrictive covenant so that it is reasonable and then enforce it as modified. The statute expressly states, “If the restraint is overbroad, overlong, or otherwise not reasonably necessary to protect the legitimate business interest, the court shall modify the restraint and grant only such relief as is reasonably necessary to protect that legitimate business interest.” By itself, this change from the current law has a potentially dramatic effect on the drafting of restrictive covenants and the ability of employers to have them enforced. In most cases, an employer could have some confidence that the restrictive covenant provision signed by an employee will be enforced by a court to some extent.

Reasonable Time Limitations

Current Law: Wisconsin’s current restrictive covenant law does not specify the parameters of a reasonable post-employment restricted time period during which an employee is prohibited from competition, soliciting a company’s customers or maintaining a company’s confidential information. Court cases over the years have created an understanding that a time period of two years or less will generally be viewed as reasonable, but there are no guarantees of this in the existing law and, thus, employers and drafters have been left to guess how courts will view a given time limit used in an agreement.

A court must presume reasonable a post-termination restraint of six months or less.

A court must presume unreasonable a post-termination restraint of longer than two years (though restraints of longer than two years could be found reasonable if clear and convincing evidence supports a longer restraint).

In addition to these significant changes, the proposed legislation contains language supportive of the enforceability of restrictive covenants. For example, the legislation provides, “A court shall construe a restrictive covenant in favor of providing reasonable protection to all legitimate business interests established by the person seeking enforcement of the restrictive covenant” and “[a] court may not employ any rule of contractual interpretation that requires a restrictive covenant to be construed narrowly, against the restraint, or against the drafter of the restrictive covenant.”

These significant changes, together with the overall pro-enforcement tenor of the legislation, would bring Wisconsin into the mainstream of states across the country when it comes to the enforceability of restrictive covenants. Of course, the bill must make it through both houses of the state legislature and be signed by Governor Walker before any of this can truly impact Wisconsin employers. If the bill becomes law, it would only affect restrictive covenants entered into, or extended, modified or renewed, on or after the law’s effective date. Employers considering implementing restrictive covenant agreements should monitor the law’s progress and determine whether or not their circumstances allow for them to wait to see if the law passes. If it does, there will be a distinct advantage to agreements entered into under the new law, rather than the old regimen.

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